Battered US insurers joi queue looking for federal hand-out

Among the well-known institutions regulated by
the OTS as thrifts was Washington Mutual, which in September became
the biggest bank to fail in US history. American Express is also
regulated by the OTS as a thrift

The Hartford Financial Services Group, Dutch
insurer Aegon’s Transamerica unit, Lincoln Financial Group,
Genworth Financial and Phoenix Companies are among the insurers
trying to become savings and loan holding companies and gain access
to government funds. In addition, Principal Financial Group, which
already owns a bank, said it is seeking to participate in the
Treasury Department programme. The insurers, with the exception of
Phoenix Companies, announced the acquisitions on the last day for
which financial organisations could apply for a share of the
billions the Treasury is injecting into financial institutions.
Phoenix Companies filed a placeholder application with the OTS
prior to the deadline, indicating that it would like to acquire a
thrift in order to participate in the Capital Purchase Program but
has not yet finalised its strategy in this respect.

None of the insurers are in any danger of
under-capitalisation, but the offer of billions in government
funding seems simply too appealing an opportunity to leave to the
banks.

Major life insurers as a group ended last year
with about four times the minimum capital they are required to
maintain to absorb losses, and they are likely to end this year
with about three times as much capital as required, according to
figures from rating agency Fitch Ratings.

Opportunity to diversify

Instead, the insurers view the government
rescue package as a once-in-a-lifetime opportunity to diversify in
as low-risk a way as can be imagined.

“We are taking these actions as a strong and
well-capitalised financial institution looking for maximum
flexibility and stability,” Ramani Ayer, chairman and chief
executive of the Hartford Financial Services Group, said in a
statement.

The Hartford recently estimated it would be
eligible for a Treasury capital infusion of as much as $3.4
billion. To qualify, the Hartford said it has agreed to
recapitalise Florida thrift Federal Trust Bank and buy its parent
company for $10 million.

Lincoln National applied to acquire Newton
County Loan and Savings Bank and Genworth Financial Inc applied to
acquire the Inter Savings Bank, according to a spokesman for the
OTS, William Ruberry.

Aegon’s US unit Transamerica, applied to
acquire Suburban Federal Savings Bank. Aegon noted in a statement
it “believes it is prudent, and possibly advantageous, to explore
the terms and conditions under which financial support may be
available”.

Genworth, which could be eligible for $1
billion in Treasury funds, announced an agreement in principle to
purchase InterBank, which it said was “subject to negotiation of a
definitive agreement” and as well as to regulatory approvals.
Protective Life of Birmingham, Alabama, is applying for bank
holding company status, hoping to acquire Bonifay (Florida) Holding
Company Inc and The Bank of Bonifay.

Appealing proposition

It is an appealing proposition for an industry
sensing a long-term downturn. Life insurance companies have taken a
hit as the financial sector imploded in recent months. Insurance
companies take consumer premiums and invest them in massive
portfolios in order to make enough money to pay out life insurance
claims.

As the credit crisis caused banks to lose
money, insurance companies have seen a significant chunk of their
investment portfolios disappear.

At the end of October, Hartford Financial,
MetLife and Prudential Financial all reported a brutal third
quarter as they took massive write-downs on investments in
financial companies that lost significant value. There was talk
that the government might extend bailout rescue efforts to the
insurance sector but that has not yet materialised.

If the insurers are approved for Treasury
funds and become thrift holding companies, they are likely to be
regulated by the OTS, which has acted as a matchmaker, linking
interested life companies with thrifts likely to fail without a
stronger partner. The gains would be significant for an agency that
lost its largest customer when Washington Mutual failed.

Even if insurers succeed in transforming
themselves into bank or savings and loan holding companies, there
is no assurance they will receive any Treasury assistance.

“I am not sure that is going to be a
successful strategy. We will – we are going to look only at
applications that we think make sense,” Treasury Secretary Paulson
said under questioning in Congress after the insurers made their
intentions known.

The legislation creating the TARP programme
was broad enough to suggest that insurance companies could be
allowed to participate, but the Treasury Department decided
insurers would have to become bank or thrift holding companies
first. Federal regulators such as the OTS or the Federal Reserve
would still have to rely on state regulators to oversee the
insurance components, and they would have limited authority over
those operations.

A number of companies have changed their
corporate structures to gain access to government funds. Goldman
Sachs Group and Morgan Stanley became bank holding companies in
September to use liquidity facilities at the Federal Reserve
Board.

Insurers’ participation in the banking sphere
is not a new development, as MetLife of New York has a bank holding
company license, while companies such as American International
Group, Nationwide Financial Services, Prudential Financial and USAA
own thrifts.

Those life insurers already organised as bank
holding companies could already be eligible to participate in the
plan, as they already operate a savings banks supervised by the
OTS. However, mutual insurer Mutual of Omaha (MoA), which has a
significant banking presence, has stated that it will not
participate in the Treasury programme. MoA was joined by fellow
mutual life insurers Massachusetts Mutual and New York Life.

Reflecting the sentiment of mutual insurers,
NYL said in a statement: “The company can meet all of its strategic
objectives without government capital, its businesses are strong
and profitable, and it is committed to remaining a mutual company
operating for the sole benefit of its policyholders.”

Notably, legal firm Morrison & Foerster
warns that insurers that convert their status to a bank holding
company will have their inter-affiliate transactions constrained
under applicable banking law, under a different and more rigorous
regime than inter-affiliate transactions under applicable insurance
law.

However, bank holding status would provide
several advantages for life insurers, including access to more
stable funding through the discount window and a perception of
stronger oversight from the Federal Reserve. This could soothe
anxious investors who have hammered the share prices of life
insurers mercilessly over the past several months.

Charles Davis